Tuesday, June 03, 2003
The threat to global free trade
Posted by David Smith at 04:00 PM
Category: David Smith' s magazine articles

For anyone interested in global free trade, and that includes pretty well everybody in business, these are worrying times. The Doha development agenda, the trade round launched under the auspices of the World Trade Organisation (WTO) in November 2001, is stalled.

Whether or not we should take seriously the idea of a post-Iraq trade backlash, and a breakdown in EU-US relations, the omens are not encouraging. Even before the war America was fully-prepared to abandon aspects of free trade, by imposing steel tariffs and more generous support for its farmers. The Bush administration may use the language of free trade but the reality has often been different.

In Europe, too, the momentum for trade liberalisation appears to have faded. Some in the EU argue that there has already been a huge amount of liberalisation, so why risk upsetting the farm lobby by going further for marginal gains that may involve significant political costs.

Or, it is said, why bother with external trade liberalisation when there is a huge amount still to be achieved in terms of internal liberalisation within the EU. Let’s focus on the challenging task of completing the single market and turning the EU into a genuine free trade bloc. Or let’s concentrate on the job of integrating the accession countries of eastern Europe into the EU.

Thus, the Doha round, launched at a time when advanced countries wanted to reach out to the developing world, is struggling for familiar reasons. The EU is unwilling to make concessions on the Common Agricultural Policy, making progress in other areas, including services, difficult.

World trade, meanwhile, remains depressed, growing by only 2.5 per cent last year against an average of 7 per cent annually during the 1990s.

It is easy to forget, at a time like this, the huge benefits global trade liberalisation have conferred, most notably to EU countries. Six of the world’s top 10 exporters of goods are EU countries – Germany, France, Britain, Italy, the Netherlands and Belgium. During half a century of trade liberalisation under the General Agreement on Tariffs and Trade (GATT) and the WTO world trade has increased 20-fold, in real terms. As average tariffs in the industrial countries have come down, from 40 per cent to under 5 per cent, so trade has gone up. This a proven economic relationship. During normal times, roughly speaking, world trade grows about as twice as fast as world output.

There remains, however, a great prize to be had from the liberalisation of services. Trade in services accounts for only a fifth of all world trade. There is a significant disconnect between the situation in most advanced economies, where two-thirds of gross domestic product is accounted for by services, and the 20 per cent share it has of world trade.

Even allowing for the fact that some services cannot easily be traded internationally, services are lagging well behind. Growth in trade in services is picking up, but from a very low base, and needs new momentum, which was one of the aims of Doha. It is also the case that whereas goods prices are subject to deflation, this is less the case for services.

For the EU, there is enormous potential from the liberalisation of services – seven member states (Britain, Germany, France, Spain, Italy, Belgium-Luxembourg and the Netherlands) are in the top 10 exporters of services. Britain, sixth among goods exporters, is second only to America as an exporter of services. Nor are there only selfish gains to be had from freeing trade in services. The World Bank has estimated that the benefit to poor countries would be of the order of $900 billion.

There is another reason why Europe should be pushing hard to get some momentum back into the Doha talks. Trade, through increased competition, puts pressure on countries to sharpen their economic act. EU economies badly need that competitive spur to become more flexible and less regulated, even if not all of their political leaders accept this.

GDP per capita in America is roughly 40 per cent above the EU average, while US GDP growth exceeded that of the EU throughout the 1990s – the longest period in modern times it had done so. EU R & D spending is under 2 per cent of GDP and steady, while in the US it is nearly 3 per cent and rising. The EU employment rate is 65 per cent, compared with nearly 80 per cent in America. Europe has, it seems, been suffering more than America from the downturn in world trade of the past two or three years. The internal market has not proved sufficient to offset the chill winds of a global trade recession, or provided the spur for efficiency and enterprise.

That is why, far from hiding behind the political difficulties of reforming the CAP, the EU should be pushing the process forwards. That is without taking into account the enormous benefits to EU consumers, and taxpayers, as well as farm exports in the developing world, from genuine reform of the CAP, the existence of which in its present form is something like a badge of shame in Europe. If the CAP is responsible for derailing the Doha round, which is a danger, that would add hugely to the damage it has already done.

The EU has a special interest in pushing trade liberalisation now, when America’s attitude to free trade is in question, and when many in Washington would favour a more isolationist approach. Even before the election of George W. Bush, and the recent downturn, there was evidence of a loss of momentum. World trade growth in the 1990s was healthy but it represented a slowing from the heady days of the 1950s and 1960s. What is crucial is that we do not go back to the grimness of the 1970s, when there was a real danger of permanent trade dislocation.

What are the potential gains from freeing trade up further? One partial estimate comes from calculations done on the benefits of liberalising transatlantic trade. According to the Treasury, which has updated these estimates, removing remaining barrier between the EU and North America would generate 1.3m EU jobs and provide an annual GDP boost of 1.1 per cent.

That would be well worth having. The danger is that potential gains like this are slipping into the distance. The EU has an enormous amount gain from trade liberalisation, and everything to lose if the process starts to go backwards.

From Business Voice, June 2003

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